“But The Rising Star Is The USA”

German industrial companies now consider investing overseas – to build new operations or expand existing ones – more attractive than investing at home. China retained the top spot for the third year in a row. The Eurozone, eclipsed by China in 2011, continued to decline. The attractiveness of other target markets slid as well. But there is one market whose attractiveness jumped: the USA!

According to the annual survey by the quasi-governmental Association of German Chambers of Industry and Commerce (DIHK), 43% of German industrial companies with investments overseas considered China the most important target in 2013, same as in 2012 and 2011. It’s no longer just a cheap place to manufacture; the cost motive has dropped from 25% in 2006 to 14% in 2013. The growing middle class makes China a hot market for German-branded products. So the primary motive is market development, and manufacturing in China for the local market: 38% of the companies thought so, and 73% of those in the auto sector – for them, China is where the music plays.

Second place, the Eurozone, edged down from 41% to 40%. For years, it had been top priority, given its geographic proximity, ease of transportation, and the shared currency, peaking in 2008 at 45%, well ahead of China. That was before the impact of the debt crisis became apparent. But it’s hanging in there. Despite the difficult situation and lousy demand, companies want to maintain their presence to be able to profit from the still elusive upticks in the economy.

Recently, companies noticed that reforms – the famous austerity – have lowered costs in some countries, whittling away at the disadvantages they had compared to Germany. If the trend continues, and if demand ever picks up, more investments might flow their way.

Other regions also declined on the German industrial priority list: South America down to 23% from 24%, Asia without China down to 27% from 28%, and Eastern Europe and Russia down to 25% from 26%. The only region that actually grew in importance was the US. In 2005, only 20% of the companies wanted to invest there. In 2012, it rose to 26%. In 2013, it jumped four points to 30%, the highest ever.

Companies cited the growing economy (“growing” in comparison to the Eurozone), the improving employment picture, and rising corporate profits – that all-important juicy fruit hanging in front of them. For companies with energy-intensive processes, and for chemical companies that use natural gas as feedstock, the US looks like nirvana.

Germany is phasing out its nuclear power plants, and much of its supply of natural gas depends on the not always palpable goodwill of Russia’s Gazprom which prices gas based on the price of oil – a ripoff, these days. Struggling with energy costs at home, companies have taken note of the shale gas revolution in the US, and the low price of gas and electricity it engendered. So 33% of metallurgical companies, 39% of the chemical and pharmaceutical companies, and 45% of the auto sector want to invest in the US. They’re also hoping that low energy costs would rejuvenate the American industrial base, which in turn would offer opportunities for German suppliers.

The US is yet more attractive as a vast, unified market. Companies are “hoping for even better market opportunities” and see “growing demand for products ‘Made in Germany,’” the report found. Given these trends and their potential, the report exuberantly concluded that other regions are hanging on, “but the rising star is the USA.”

For Germany itself, the picture is less rosy. The index for domestic investments has plunged three years in a row, from 28 in 2011 to almost zero in 2013 – growth in domestic investments has come to a standstill! Companies that invest overseas to conquer new markets also plan to invest in Germany. But companies that invest overseas for cost reasons are cutting back at home – they’re offshoring jobs. For them, Germany has lost its competitive advantages. The report called it “a warning for Germany as an industrial location that improvements in terms of labor costs, taxes, and energy costs no longer make any headway.” More trouble for the already listing miracle economy.

Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.